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China’s housing markets:
April 28, 2011
Regulatory interventions mitigate risk of severe bust
Strong house price growth in China. Average house prices increased by
19% in 2010 and by 25% in 2009. In some cities average house price growth was as high as 34% p.a. Even though strong income growth and ongoing urbanisation trends justify rapidly rising prices, the latest momentum has been too strong.
Catch-up in western cities. At the beginning of this rally the top 5 cities in
China saw the fastest house price growth. This shifted gradually towards the somewhat smaller Class-2 and Class-3 cities in the west.
Challenging affordability. Even if China was able to keep income growth at
10%, it would take 20 years for affordability of current house prices to come down to European levels. This represents not only economic, but also social challenges.
Far-reaching regulatory answers. Both central and local governments
implemented tightening measures for lowering speculative demand and for boosting supply of affordable housing. This will lead to a strong decline in house price growth this year and might even lead to falling prices. A nation-wide severe house-price crash is not in sight in our view. However, particularly regionally focused developers are set to face a further cooling market. Consolidation on the developer market will continue, liquidity and regional diversification are important success factors for this market.
Only moderate macroeconomic distortions: Falling house prices will lower
private consumption. However, we find that the impact is not particularly strong. The direct negative impact on the construction industry would be more important and this could translate into stress for bank books, too. Considering the comparatively conservative financing, an American-style crisis scenario is not likely, though.
Authors Ulrich Clemens Steffen Dyck +49 69 910-31753 email@example.com Tobias Just +49 69 910-31876 firstname.lastname@example.org Editor Syetarn Hansakul Technical Assistant Sabine Berger Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: email@example.com Fax: +49 69 910-31877 Managing Director Thomas Mayer
Accelerating price growth
X-Axis: Average annual property price growth 2006-2010 Y-Axis: Average annual property price growth 2000-2005 30 25 Xi'an Nanchang Shenzhen Kunming Shijiazhuang 20 Beijing 20 Qingdao Haiko 15 10 5 0 -5 25 30
The diagonal represents the 45° - line along which the respective growth rates are equal
DB Research Moderating growth in property transactions Residential floor space sold. i. Although prices in Class-1 cities like Shenzhen. we take a closer look at the developments in 35 cities across the country. Shanghai. and Tianjin. DB Research Improved affordability in top-tier cities House prices/disposable income. 1 Sources: CEIC data. related to that. interest rates and population growth are the main drivers of property prices. Shenzhen. Source: CEIC data. 2010. Guangzhou. the affordability index for the top 5 cities is still 50% higher and for overall China 14%.8 and 19. while construction costs and. a catching-up process is observable. Qingdao. property price growth accelerated significantly within the last few years. Asian property markets: No significant bubbles – yet! Deutsche Bank Research. Second. house price growth rapidly picked up again. In Haikou and Shijiazhuang the growth differential was as big as 19. In all cities property prices 4 have risen strongly since 1999.e. we were reluctant to call it a 1 serious distortion then. T. On average house price growth in the 35 cities was 8. While there were obvious signs of overvaluation already a year ago. At the same time affordability has 3 improved in the top 5 cities and deteriorated in overall China. In all but three cities (Nanchang. S. We analysed the housing markets of 35 Chinese cities. Regional differences in house price dynamics After a drop in the course of the global recession in 2008. What is more. In order to assess whether this momentum has been excessive. Just. S. However.Current Issues 1. % yoy 12M moving average 80 70 60 50 40 30 20 10 0 -10 -20 -30 00 02 04 06 08 10 3 Sources: CEIC data. income. Thus.3 pp. Huelser. we try to assess the success of the various policies and their potential negative impact on the economy and the financial system. This has raised concern as to whether this development has created a new real estate bubble. These are: Beijing. we look at the fundamental drivers of property prices: on the demand side. Index Jan 2010=100 106 104 102 100 98 96 94 92 Jan 10 Apr 10 Jul 10 Oct 10 Avg. average annual growth rates of residential property prices in the last five years exceeded their ten-year average. regional differences are pronounced. April 28. In China’s top 5 cities house prices have increased on average by 8% since beginning of 2010 and by almost 18% for the country as a whole (see chart 1). Introduction China's residential property prices continue to rise Index. growth of transactions has come down markedly over the last 12 months. top 5 cities House prices in China have risen by 53% over the last four years. In 2009 house prices in the 35 analysed cities rose by 17% and by 22% in 2010. However. looking for potential regional real estate bubbles. (2010). a new assessment of the market appears 2 necessary. compared to early 2007. But as house prices have continued to rally in many Chinese cities. even somewhat faster than house price growth in overall China (2010: 18%). For an overview of the classification of the cities see table 22 in the appendix. we want to focus on two important questions in this report: first. It appears that the series of measures that was designed to reduce the risk of a real estate bubble was more successful in the top 5 cities than elsewhere. respectively. top-5 cities 2 China overall 2. June 23. 2011 2 . DB Research 2 3 4 Dyck..3 pp faster in the five years between 2006 and 2010 compared to the previous five year period. Xi’an). The slight improvement 2010 might just be a drop in the ocean. Current Issues. the construction volume determines prices from the supply side. Beijing or Shanghai are still significantly higher than those in smaller cities. 2007=100 170 160 150 140 130 120 110 100 90 80 07 08 China overall 09 10 1 Avg.
e. This indicator clearly signals a sizeable overvaluation of house prices for most regions. Shanghai.e. Chart 7 shows that in most of the 35 analysed cities. Jan 07=100 220 200 180 160 140 120 100 80 07 08 Central North South 09 10 Coast Northeast West Sources: NBS. For a definition of the individual regions.China's housing markets Accelerating price growth X-Axis: Average annual property price growth 2006-2010 Y-Axis: Average annual property price growth 2000-2005 30 25 Xi'an Nanchang Shenzhen Kunming Beijing Shijiazhuang 0 5 10 15 20 25 30 Source: NBS The diagonal represents the 45° . buying residential property has become less affordable 5 5 Top 5 showing slowdown Price-rent ratios. and Shenzhen. Jan 07=100 200 180 160 140 120 100 80 07 08 Class-1 cities Class-3 cities 09 10 Class-2 cities Sources: NBS. NDRC 6 6 7 8 However. Xi’an. Consumer perspective: Prices rising faster than incomes in most cities Another important indicator of a potential overvaluation of the housing markets is the price-income ratio. show decreasing price-rent ratios in Q4 2010. i. as a rising ratio suggests that an increasing share of an investor’s expected return stems from expected capital appreciation. since rental yield may be less of a consideration compared to other countries' experience. economically smaller cities like Fuzhou. The development of the price-rent ratio is of particular interest for investors. As these ratios remain on elevated levels. however.line along which the respective growth rates are equal Qingdao 20 15 10 5 0 -5 Haikou 4 Price-rent ratio: Top 5 lose speed. and that therefore the significance of the ratio might be diluted. One should note. may lead to an upward bias of the ratio when the fundamental drivers for the luxury segment are stronger than those for the affordable sub-segment. Urumqi or Zhengzhou are showing no signs of a slowdown yet. the price-rent ratio is prone to measurement errors. smaller cities catch up Price increases exceed increases in rents Price-rent ratios. prices have been growing much faster than incomes. Guangzhou. the measures might not have gone 8 far enough (see chart 6). from potential future rental growth. closely followed by cities from coastal China (see chart 5). Tianjin. This implies that speculative motives play an 6 increasing role. rather than from current 5 rental returns. A glance at the ratios of the 35 cities shows that prices have been rising faster than rents in all 35 cities since 2007. see the respective chart in the appendix. 3 April 28. What is more. NDRC The single-best indicator for a real estate bubble is the deviation of house price growth from rental growth. However. the fact that a large number of properties in the growing luxury segment are only for sale. that real estate in China is bought partly due to lack of investment alternatives. measures that were taken recently by the Chinese central government and the municipal governments (see table 20) to cool the property markets seem to have had a positive effect. which account for over 15% of Chinese GDP and which were among the first to implement the tightening measures. with cities in Western and Southern China experiencing on average 7 the highest increase. which measures the affordability of housing. i. The extremely sharp increase in 2009 in chart 6 is to a large extent due to rapid price growth in Shenzhen in late 2009 and early 2010. 2011 . The five economically most important cities Beijing. For example. while lower priced housing might also be for rent.
Prices rise faster than incomes X-Axis: Price Change Q1 2007 .3% of its annual disposable income for a square meter.9 persons.g. rather than persons. income per capita House price/disp. In two cities affordability stayed roughly constant. and the five top cities showed decreasing ratios in late 2010. Germany and Spain (end of 2010 values).4%). Among these cities the respective ratio for Fuzhou. Hangzhou. Shenzhen. in Germany of slightly more than 2 persons. Urumqi more than doubled. the biggest increase in Shenzhen (+169. and in the remaining 27 cities the ratio increased by an average of 62. for Beijing even 75. household formation is different in these countries. Basically. The most pronounced drop was registered in Shenyang (-25%). in six out of 35 cities housing even became more affordable (e. these comparisons are misleading in two respects: first. the city-level priceincome developments differ a lot more. Only 5.Current Issues as households have to spend an increasing share of their disposable income on housing. Hohhot had the lowest ratio in early 2007.Q4 2010. are demanding housing space. income per household Source: DB Research Tianjin Kunming Qingdao Beijing Nanning Lanzhou Urumqi Fuzhou Hangzhou 100 Affordability can improve only gradually House price (2010)/disp. Within the last three years. However. it is better to compare house prices by disposable income per household. either: it takes three annual household incomes in April 28. Shenyang. NDRC 8 Beijing 9 This development appears even more scary when compared with the respective affordability ratios in other markets: we compare a simple affordability ratio for China. house price over income Ratio for average 100 sqm flat Beijing China Germany Spain House price/disp. However.2% of the annual disposable income had to be spent to buy a square meter of residential property in Hohhot. in % 200 0 20 40 60 80 150 7 Shenyang International comparison Affordability. However. But this indicator does not change the picture significantly.Q4 2010. As households. The ratio of house prices and disposable income per capita was roughly 6 for Germany and 8.6%. In China an average household consists of 2. or – to put it differently – an average household in Beijing needed to spend more than fifteen years of income to afford buying a 100 square meter apartment. in % Y-Axis: Income change Q1 2007 .3 for Spain. Ningbo. For China the figure was as high as 48. Dalian) between Q1 2007 and Q4 2010. 2011 4 . In Beijing an average household had to spend 15. income per household (year x) 30 25 20 15 10 5 0 2010 2014 2018 2022 2026 2030 2034 Overall China Germany (2010) We assumed an annual increase in China's income of 10% Source: DB Research 50 Shanghai 0 Shenzhen -50 0 50 100 150 200 The diagonal line represents the 45°-line along which the price change equals the income change Sources: NBS. this time has risen to almost 30 years years in Beijing while it stayed roughly constant in Hohhot. one should keep in mind that the levels from which the respective cities started also differed considerably. Western and Southern China. the affordability index draws a similar picture as the pricerent ratio above: housing affordability deteriorated fastest in the coastal regions.
this indicator clearly points to a significant adjustment risk. for example by increasing supply of public and affordable housing. as the expectations of investors and builders are negatively affected. After the volume of completed floor space had peaked in 2009. 2011 5 . attempts to lower demand can also lead to reducing supply.5 -1 -0. Income growth would need to be as high as 18. as demand and supply are responsive functions. it can be argued that very dynamic income growth can justify higher house prices. But even if we (plausibly) assume significantly smaller flats in China than in Europe. Vacancy vs prices: Only slight negative relationship X-Axis: Change in vacancy rates 05-08.0 1. data on vacancy rates are only available until 2008). Second.5 0 0.5 -2 -1. while incomes rise).5 1. Indeed. which stays in its flat. in pp Y-Axis: Price change 05-08.unintended .5 0.5 Source: NBS As vacancy rates already fell from 2005 to 2008. It seems that policies aiming at curbing demand. this compares to 16 annual household incomes in overall China and even 27 incomes in Beijing. it would take almost 20 years of annual income growth of 10% for China to reach similar affordability ratios as Germany or Spain.5 1 1. These measures were aimed at both slowing speculative demand (particularly in the luxury segment) and stimulating supply (particularly in the affordable segment). Looking at our 35-city sample.0 Class-1 Class-2 2005 Class-3 2008 Source: NBS 10 100 90 80 70 60 50 40 30 20 10 0 2 11 -2.overall reduction of completed floor space. This comparison of course implies that the average flat size in China can hardly reach average European levels any time soon. Theoretically vacancy rates and residential property prices should show a strong negative relationship. as affordability improves with every year (for a single household. we only find a very weak negative relationship between these two variables (see April 28. at first sight completion data suggests an aggravation of the problem in the last few quarters. house prices can be assumed to remain constant. in % 2. However.0 0.5% in overall China to reach German affordability level within only ten years. such as home purchase bans and mortgage restrictions.5 2. the current reduction in supply might further raise upward pressure on house prices (unfortunately. However. however. in % Beijing Guangzhou Fuzhou Urumqi Chengdu Shijiazhuang Yinchuan Lanzhou Xi'an Shenyang Shanghai Hohhot Xiamen Shenzhen Decreasing vacancy rates Vacancy rates. also negatively affected the supply side and therefore led to an . as rising vacancy rates signal growing oversupply and this should reduce pricing power of landlords.China's housing markets Germany and Spain to finance 100 sqm of living space. it declined in 2010 in 24 cities (by 17% on average from its peak levels). Supply-side developments: No clear sign of overvaluation In order to slow down price growth on Chinese property markets. the Chinese government imposed various policies (see table 20 in the appendix).
The opposite holds for cities in the upper-left corner of the graph. this simple binary regression cannot control for additional factors. or Chongqing.5 2. these key international cities are facing increasing foreign investor intererest. it is worth noting that the overall vacancy level was still low in all Chinese cities. while prices increased in all cities. The risk of a speculative housing bubble seems to be somewhat smaller for cities in the lower-right corner like Hohhot with relatively low price increases compared to their expected population growth.5 3. in % 4.0 1.0 0. From 2005 to 2008 vacancy rates rose modestly in 14 out of 35 cities. such as Qingdao.5 4.5%.0 Beijing Guangzhou Shenzhen Shanghai Tianjin trend line in chart 11). but prices have continued to rally up in some cases. UN 9 10 Of course it might also raise questions regarding the reliabiliy of the underlying data. we include the United Nations Population Division forecasts up to the year 2025 in our analysis. Second.5 1. i. However. NDRC. There can still be a partial effect after controlling for income growth. 2011 6 . in some of the east German federal states. Even though in some markets house price momentum has come down in the last few quarters. Demographic developments Although high price-income ratios as well as the increasing volume of mortgage loans strongly point to an overheating of some housing markets.0 3. Highest risk in coastal cities All in all. Furthermore.5 0. April 28. In order to determine in which cities price developments might partly be justified by population growth. in % Y-Axis: Price-rent ratio. the development on the supply side does not clearly indicate overvaluation. All in all. we see that vacancy rate developments differ substantially between cities. governmental subsidies or building activities. the big. the current price levels seem to be disconnected from fundamental drivers. we do not know how well the UN forecasts actually mirror Chinese expectations towards regional demographic trends. our analyses show a general dichotomy between two city groups: on the one hand. established and often coastal cities such as Beijing. Plotting these forecasts against the current level of the price-rent ratios (see chart 13) reveals a mixed picture. Demographics are no clear driver X-Axis: Population change forecast 2010-2025. Hangzhou. At 4. This might indicate that speculative motives 9 have become more important than fundamental driving forces. Yinchuan showed by far the highest rate in 2008.Current Issues Top 5: diverging paths Vacancy rates. Q4 2010 (Jan 07 = 100) Qingdao Shanghai Chongqing Xi'an Hangzhou Lanzhou Nanning Shenzhen Kunming Beijing Urumqi 2005 2008 Source: NBS 12 Demographic trends help to mitigate the risk 280 240 Fuzhou Yinchuan Xining Xiamen Hohhot 200 160 120 80 Nanjing 15 20 25 30 35 40 45 13 Sources: NBS. favorable demographic trends will help mitigate this risk at least in the medium or long term.0 2.e. Shenzhen or Shanghai not only show the highest price levels. Taking a closer look at chart 11. There are some important caveats to this result: first. vacancy rates are almost twice as high. the high price-rent ratios are not related to the 10 demographic perspectives of the analysed cities.
2007. May 2009. the risk of a strong negative impact of falling house prices for private consumption seems limited: according to estimates by the Hong Kong Monetary Authority (HKMA). The five economically most important cities − Beijing. The household liability-to-asset ratio is below 20% in China compared to 34% in Germany. p.7%. In line with this observation. Here.c. We ran a simple multi-variate regression. Financial Wealth. dividends or net rental income made up more than 14 20% of total household income in the US. al. Third. and reduced government revenues. University of California. the impact appears manageable. Property income accounts for about 2. Due to limited data availability 11 most of these studies have looked at the US or the UK. Second.5 2. in 2008 income from interest. NBS 15 Over the last few years there has been a growing body of literature focusing on the question as to how changes in financial and housing wealth affect private consumption. income from real estate such as rental income or capital gains does not play a big role in overall household income. but not strongly with house price growth.5 0. Ziman Center for Real Estate Working Paper No. 13 respectively. 1.0 2. Kunming. property markets in many Class-2 and Class-3 cities like Urumqi and Fuzhou have further growth prospects based on high expected population growth and growing economic importance. By comparison. growth in private consumption was strongly correlated with income growth. Tianjin and Guangzhou − alone make up 15% of total GDP. US Census Bureau. p. 26.China's housing markets Here. As private consumption has grown by roughly 10% p. 3. No 1057. a negative impact on private consumption and investment (via negative wealth effects).5 1. with growth of private 11 12 13 14 Skudelny.5% of total household income for urban and rural households alike (see chart 14). house prices in smaller cities towards the west like Urumqi. the use of property as collateral to finance consumption expenditures is not very common in China. Transmission channels of a bursting housing bubble are slowing construction activity. On the other hand. 2011 . Shenzhen. Frauke (2009). Bostic et. and Consumption: New Evidence from Micro Data. have been growing very fast. House prices Sources: IMF. For China. It is thus necessary to analyse potential negative implications for the macro economy from house price corrections. 37% and 32% in the UK and the US. Macroeconomic implications Property income: low but rising Household property income. HKMA (2010). Together they account for almost 40% of national GDP. mispricing still seems comparatively small. and Fuzhou.a. Chinese households finance residential property only to a small extent with debt. 113. Shanghai. a 10% fall in property prices 12 would result in a drop of private consumption by only 0. It is therefore worrisome that it was exactly these cities where we found the strongest indication for housing bubbles. Sep 2010. a market correction is likely. 7 April 28. Euro area private consumption: Is there a role for housing wealth effects? ECB Working Paper Series. as well as balance sheet stress for the banking system. as can be seen from chart 15. % of total income 3. Housing Wealth. PBoC (2010). Private consumption: Minor fall-out expected 10 Urban 14 Private consumption: house prices play minor role % yoy 35 30 25 20 15 10 5 0 -5 95 97 99 01 03 05 07 09 Private consumption Disposable income p. but from very low levels. (2007). This has several reasons: first. Financial Stability Report 2010..0 03 04 05 06 07 08 09 Rural Source: CEIC data The 35 cities considered in this study are very important for the Chinese economy. unlike in many developed countries. While the gap to the Class-1 cities is still big with regard to absolute levels. Half-yearly monetary and financial stability report.0 1. Los Angeles.0 0.
as the number of data points was very small. Job losses in construction. whereas in Guangdong province real estate related investments account for less than 30% of total FAI. Lillian Cheung. Nathan Porter. Investment: Negative impact varies from city to city Currently. this 15 result is by and large comparable to the findings of HKMA. now accounting for 2% of total employment in China. The larger impact of a property price correction on investment than on private consumption can be explained by indirect effects on related sectors like cement. government revenues might be heavily affected by a collapsing real estate market. The construction sector accounts for 14% of total employment and this share has risen quite significantly over the past decade. Ashvin. See a more detailed description of conflicting goals below.68 0.08 1. Gaofeng Han. For example. In some cases like Chongqing the share is as high as 30%. almost twice as much as in 2003.72 0.D. For instance in Beijing. Error t-Stat. construction machinery etc. According to Ahuja et al. 16 (2010) . up from 22% in 2009.09 0. The resistance of local governments to forgo a strong source of revenue might also help to explain why relatively draconian measures announced by the central government have so far not led to a significant reduction in 17 property prices.34 Source: DB Research consumption as endogenous variable and income growth and (lagged) house price growth as exogenous variables. real estate and related sectors might put a dent on income growth and affect private consumption negatively. steel.2 pp. the introduction of a nationwide property tax is often cited to help ease resistance of local governments. Ahuja. However. WP/10/274. Are house prices rising too fast in China? IMF Working Paper.18 16 15 16 17 We have to be very careful in interpreting this finding. 0. and Wenlang Zhang (2010). April 28. 2011 8 .18 0. The importance of real estate services as a source of employment has also increased over time.12 2. Dec 2010. the construction sector accounts for more than 6.06 1. a 10% drop in property prices could decrease China’s investment by about 4%. 4. roughly 50% of the total FAI are real estate investments. shares vary significantly across regions. Addressing China’s property bubble must therefore also address local governments’ financing constraints. Nationwide real-estate-related fixed asset investment (FAI) accounts for 24% of total FAI. dependent var Coefficient Std. up from 5.73 0.77 0. Although the coefficient is bigger. We find that a decrease in house prices by 10% would translate into a drop in private consumption by 1. as land sales account for a big share of local governments’ revenues.5% of China’s GDP.00 10. Government revenues: Significant impact on local governments In contrast to private consumption.5% in 2000.68 1.Current Issues Private consumption is partly driven by house price growth Dependent variable: private consumption Included observations: 14 after adjustments Variable INCOME HP(-1) C R-squared Adjusted R-squared Prob(F-statistic) Mean dependent var S.58 3.
000 per square meter in the five Class-1 cities covered in this study. whether developers. who have heavily focused on Class-1 and -2 cities in the past. either by closing down or merging with bigger competitors. 2011 .6 0.000 4.0 0.0 07 08 09 10 Source: CBRC 19 19 20 See Tsang. however. from 18 less than 10% in 2008 to almost 13% in 2010. As tightening policies have so far focused on major cities like Beijing or Shanghai.000 6. DB Research NPL ratio declining steadily NPL ratio of Chinese commercial banks' housing mortgage loans. 26 Nov 2010.000 14. but were by and large 50% to 70% lower for Class-2 and Class-3 cities.2 0.4% as of end-2010.China's housing markets Property developers: Mixed impact Big land price premium in top cities RMB/sq m.000 0 08 Class 1 09 Class 2 10 Class 3 17 Sources: CEIC data.000 2. and Jason Ching (2010). p. and in fact land prices have already come down over the past few months. the NPL ratio for housing mortgage loans was very low at 0. for instance. On the negative side. This offers opportunities – especially for market players with better 19 financial fundamentals. Strongly focused developers are thus facing significant risk of the expected market consolidation in Class-1 and -2 cities. financing is getting more difficult. Venant Chiang. Also. Note that delinquency rates and NPL ratios are not completely comparable. In the longer term. inflation hedge. precrisis delinquency rates on real estate loans in the US stood at 1. 25. In line with this.000 8. With this magnitude. p. GDP-weighted averages 16. Mortgages make up around two-thirds of propertyrelated lending whereas loans to developers account for around one-third. At the same time. % 1.000 12.6% 20 in mid-2006.. some companies will have to exit the market. can shift easily their business to lower-class cities. Deutsche Bank Global Markets Research. comparatively stronger income growth in inland areas and smaller cities supports increasing demand for residential property in these areas. this consolidation will put the industry on a more stable footing. property developers are beginning to focus increasingly on China’s hinterland. Also. many developers have recently begun to build up liquidity buffers in order to be prepared for a possible market downturn. Similar to developments in manufacturing. As data from the China Land Surveying and Planning Institute shows. where prices have increased strongest (see overview table in appendix). The market share of China’s top 20 property developers has already risen over the past few years. 9 April 28. More recent data from Soufun.com shows a similar spread between established centers and lower-tier cities. Tony. in the case of a property market correction nonperforming loans at Chinese banks would almost certainly rise 18 Manageable direct exposure of Chinese banks Property loans. China Property: Fighting inflation vs.2 1. the upward pressure for peripheral cities is likely to continue. % of total LCY loans 25 20 15 10 5 0 05 06 07 08 09 10 Mortgage 18 Developer Real estate Sources: CEIC data. residential land prices are usually significantly lower in inland areas (see chart 17): average prices reached more than RMB 13. Nevertheless. DB Research Tightening measures and a potential property price correction can have both a long-term positive and short-term negative impact on developers. In addition. 29. It is questionable.000 10. presale funding).8 0. By comparison. China’s banking sector exhibits lower exposure than banks in typical OECD countries: the share of property-market-related lending stood at more than 50% of total loans in the case of the US and Hong Kong. both in terms of bank financing as well as other sources (external debt. however. See ibid. lower residential property prices will also weigh on land prices. Banking sector: Faces both direct & indirect exposures The total direct exposure of the Chinese banking sector to the property market is below 20% of total local currency loans outstanding. according to data from CBRC.4 0. since delinquency rates are distinguished by the length of delay of payment.
Second. Ongoing urbanisation. According to Fitch.Current Issues significantly. and this will help to improve affordability. Second. pent-up demand stays in place. rising incomes. Developments in China’s property market are driven by a structural and by a cyclical component. Sixth. p. We perceive the risk for the construction industry to be the most important one – both for the financial sector and the overall economy. April 28. the government’s policies to slow price increases are relatively aggressive. This bolsters the residential real estate asset class. and this has pushed up house prices beyond their fundamentally justified levels. 27. Third. 2011 10 . and the focus on affordable housing and development of rental markets in particular. Fifth. Fourth. a sustained sharp price correction is not very likely: first. a careful mix of policies that are both slowing 21 22 Considerable drop in GDP possible but recession not likely HKMA (2010). What might be even more important. Assessing the likelihood of a sharp property price correction There is little doubt that there has been a growing speculative component in property markets in many Chinese cities and/or segments. household savings rates are still high and inflation rates are expected to slow only moderately from H2 2011. Nevertheless. when? 3) How serious are the implications for the economy? Mitigating factors for sharp price corrections: Pent-up demand stays in place Increasing foreign investors' interest Lack of alternative investment High household savings rate Positive outlook for income growth Government policies are positive for the long-term 20 We do not dare answer the second question but venture to give some thoughts on the first and third one. This is also due to the fact that loans to sectors with strong cyclical linkages to the real estate sector account for another 21 24% of total bank loans. With regard to question 3 − how big the resulting macroeconomic distortions might be − we conclude that both the impact for the domestic but also for the global economy will be considerably smaller than the distortions from the bursting US house price bubble. no additional disruptions are to be feared from securitised products. The second effect could in turn negatively impact overall economic activity. Investing in residential property remains one of the few investment opportunities. Government tightening measures are targeting these developments but have so far shown limited impact. First. too. Third. In our view. February 2011. the outlook for income growth remains positive. the observed price rises in some cities have increasingly delinked from fundamentals. will cushion the impact on property developers and the construction sector in the medium term. Chinese financial markets are still underdeveloped and especially for individuals lack attractive investment alternatives. helping to stabilise prices again. for some banks the share of property22 related loans is as high as 35% of total loans. Thus. If prices were to drop rapidly by a significant amount (say more than 10% on a national scale) potential first-time buyers who have so far been excluded might step in. This leads us to three important questions: 1) Will the bubble burst? 2) If so. even if private consumption and private investment decreased Chinese GDP growth by a considerable 2-3 pp. housing finance is much more reliant on equity than debt in China. foreign investor interest in Chinese property markets is showing signs of strengthening again which adds another stabilising factor. limited investment policies as well as cultural factors favour the property market. aggregated data mask different exposures of individual banks. this would not place the economy in danger of recession. Fitch presentation on Chinese banks.
The long awaited property tax. So far. The implementation of these measures is therefore often delayed or diluted. who left property undeveloped for a long time were imposed. price control targets. were relaxed or reversed in the course of the global 23 recession following the financial crisis in late 2008 . supply-side support measures. 11 April 28. One key target of the government is keeping housing affordable. In the medium-term. As fears about a possible bubble on Chinese housing markets have been growing. the State Administration of Taxation. second and third-round macro controls. as purchasing power in China is heavily affected by rapidly rising consumer prices. Already in 2007. As a reaction. The high number of measures and especially purchase bans targeted at secondhome buyers and non-local households as well as the declining transaction volumes following the imposition of these measures indicate that the latest rally did not stem primarily from a growing number of first-time buyers. the intended shift towards a larger share of first-time buyers on the housing market seems viable. tightening measures were intensified and the Chinese central government imposed a set of draconian policies that have become known as first. With house prices picking up again quickly. two types of measures were imposed: first. since local governments and officials often have conflicting interests. aiming at increasing supply of affordable and social housing. In general. it is important to keep a balance between a functioning home-owner’s market and a sustainable rental market. some of which. Beside the central government the main regulating agents are the municipal and provincial governments. and the Ministry of Housing and Urban-rural Construction. This looks even more important. measures aiming at suppressing the demand for second and luxury homes. there are big problems in enforcing the measures enacted by the central government at the local level. Here the Ministry of Land and Resources. however. only the municipal governments of Shanghai and Chongqing implemented a trial property tax scheme 25 in January 2011. for example by imposing taxes or raising minimum down-payment rates.e. In that sense. a number of tightening measures were imposed. the central government tried to gain control over local decision-makers by requiring them to regularly report statistics and results. the tightening regulations got more intense: home purchase bans for residents meeting certain requirements. This may create an important conflict: while rising CPI may call for higher interst 23 Macro controls Measures aiming at surpressing demand 24 Measures aiming at supporting supply 24 25 For an overview of the imposed measures see the respective table in the appendix. and confiscation of idled land from real estate developers. and second. has not yet been imposed nationwide. 2011 . the government returned to its tightening course. and hold them accountable for implementing central government measures. however. as real estate markets showed no sign of slowing. they benefit from booming housing markets. The property tax in Hongkong is – despite its name – classified as an income tax. since it is imposed on rental incomes only. i. However.China's housing markets demand and bolstering (affordable) housing supply is the key for dealing with the current distortions. In 2010. Regulatory responses: Keeping home prices affordable for the population The Chinese government has recognised the possibility of overheating property markets early and has reacted quickly.
Conclusions China’s house prices continue to soar and fears have risen that a bursting bubble can put both the national and the global economy at risk of a new slowdown. adds further pressure on house prices. then. the latest measures seem to have some effects on most Chinese housing markets.com) 12 April 28. Both scope and scale of the measures appear well dosed to deal with the problem. is yet to be seen. What is more. However.com) Tobias Just (+49 69 910-31876. Although the risk of rapidly falling house prices has risen. Although the first two rounds of macro controls affected housing markets only temporarily. these cities are still far from reaching the same levels as the key cities Beijing and Shanghai. a similar development like in the US or Spain is not very likely. Still. we do not expect a severe crash. this can burden the private building markets. the gun powder of a national transaction tax is still dry. and financing is still comparatively conservative. Whether these effects are also only temporary or represent a trend reversal.Current Issues rates. Pent-up demand and overall macro-economic dynamics are still strong. Ulrich Clemens Steffen Dyck (+49 69 910-31753. Lower supply. tobias. and this does not only imply political but also social risk. Risk of falling prices has risen As both the central government and local governments have enacted strict policies to slow the market. as implementation is important. steffen. 4. a risk of significant delay still remains. despite the rapid catching-up process. as argued. housing in the top 5 is still not easily affordable. While house price momentum in the top 5 cities has slowed on the back of tightening measures. yet. 2011 . Even in case of a more benign slowdown the construction sector and related industries are facing a potentially big negative firstname.lastname@example.org@db. However. house price growth in economically less important cities in the west is still high and above fundamentally justified levels. What is more. we expect that house price growth will come down significantly in 2011 – not only in the top 5 cities.
Minimum down-payment ratio and mortgage rates are higher for third mortgage loans. residential redevelopment properties and owner-occupied ordinary commodity housing to at least 70% of the total land supply. Nov 07 Cross 'Ordinary Residential Property Tightening Development' from the list of industries open to foreign investment. and will be only 30% for second-time home buyers). Oct 08 Waive stamp duty on housing transactions and Relaxing value added taxes on land transactions. Raise the downpayment ratio for the second mortgage to 50% and the minimum rate to 110% of the benchmark rate. Ministry of Finance Nationwide Nationwide Ministry of Finance Nationwide Central government May 09 Nationwide Central government Feb 10 Mar 10 Beijing Nationwide Beijing municipal government Ministry of Land and Resources Mar 10 Beijing Beijing municipal government Central government Apr 10 Nationwide Apr 10 Beijing Beijing municipal government China Securities Regulatory Commission (CSRC) Beijing municipal government Jun 10 Nationwide Sep 10 Further tighten down-payment requirement. Set the amount of land supply for social welfare Supportive housing. Dec 08 Extend preferential policies for first-home Relaxing purchases to second-home purchases. Restrict foreign investment in second-hand house transactions. Shorten the holding period to enjoy business tax exemption from 5 years to 2 years. Aug 08 Forbid loans for land purchases and for idle Tightening projects. to purchase one new home. local or from outside the city. Reduce developers' capital requirement for Supportive economic and commodity housing investment to 20%. Lower the minimum mortgages rate to 70% of the benchmark rate and the down-payment ratio to 20%. Significantly increase downpayment ratio and minimum mortgage rate for the third mortgage and any subsequent mortgages. Tightening even for first-time home buyers (for instance. the maximum mortgage loans for some new housing projects in Beijing are only 60% of the purchase price for first-time home buyers. Beijing April 28. Tightening Reach Nationwide* Nationwide Agent State Administration of Taxation China Banking Regulatory Commission (CBRC) Sept 07 Tighten credit to the property sector: raise the Tightening minimum down-payment ratio to 40% and the minimum mortgage rate to 110% of the benchmark rate for second mortgages. Change the land auction winning rules such that Tightening sites now go to the bidder offering not the highest but the most reasonable price. Impose home purchase restriction rule that will Tightening only allow households.China's housing markets Appendix Selected regulatory responses by Chinese administrations Date Jan 07 Measure Type of measure Impose value-added taxes on land transactions. 2011 13 . Set the share of residential land supply going to Supportive policy-oriented housing projects to 50%. Suspend approval of listing of property companies via "shell companies". Tightening Nationwide National Development and Reform Commission (NDRC). Restrict mortgage lending to non-residents. Raise minimum down-payment ratio for the first Tightening mortgage to 30% for a residential property of no more than 90 square meters.
Nationwide 14 April 28. 2011 . real estate taxes and stamp duties for such projects. → Relaxing the tightening measures of the secondround macro-control. with over-priced projects subject to higher taxes. Hold local government officials accountable for implementing central government measures. Give approval to developers to sell luxury residential Relaxing homes following falling prices in October and November. Allow overseas institutions to purchase non-residential property only in the city where it is registered. Shanghai.Extended to 2011. Supportive Nationwide Ministry of Land and Resources.e.8 million units in 2010. Suspend the issue of new loans for property Tightening development from the end of October. by exempting business taxes. Ban local governments from supplying more land for high-end housing development if they have failed to meet the quantitative targets for land supply for social-welfare and low-income housing development. Shenzhen. currently set at 70% of total supply. Tianjin. Ningbo.Current Issues Sep 10 Tighten land management by prohibiting developers Tightening from bidding for new plots of land if they have land that has been purchased for property development and yet left idled for a year. the real estate sector as well as the control of liquidity risks. Lanzhou Shanghai Shanghai municipal government Nov 10 China's four biggest Stateowned commercial banks Nov 10 Nationwide China Banking Regulatory Commission (CBRC) Nov 10 Limit foreign individuals’ purchase of residential property Tightening for own use to one. Raise minimum down-payment to 30% for all first-time home buyers. Nanjing. land-transaction deals closed either with a price 50% higher than the auction starting price or with a record high price for similar locations). State Administration of Foreign Exchange Beijing municipal government Dec 10 Beijing Dec 10 Nationwide Ministry of Housing and Urban-Rural Construction Ministry of Land and Resources Dec 10 Require local governments to report unusual land Tightening transactions (i. Impose specific risk control requirements on bank Tightening lending to local government investment companies. Restrict land supply to high-end housing and make it available only if land supply for low-end housing has been fully met. Wenzhou.** . Suzhou. "Cities with Ministry of Housing and high/soaring home Urban-rural Construction prices": Beijing. up by over 72% from 5. Hangzhou. limiting the Tightening number of houses that individuals or households are allowed to purchase. Increase social welfare housing construction to 10 million units by 2011. Haikou. Ministry of Housing and Urban-Rural Development Sep 10 Nationwide Ministry of Finance Sep 10 Oct 10 Outright suspend mortgage lending to third-home Tightening buyers. Dalian. Impose home purchase restriction rules. Support the construction and operation of public rental housing projects. Sanya. as the banks have used up all their lending quotas for the real estate sector in 2010. Xiamen. Supportive Nationwide Ministry of Land and Resources. Fuzhou. Require banks to step up the management of consumer loans. Guangzhou. regardless of the size of the housing unit. and to prevent borrowers from using consumer loans for home purchases. also plans to extend this measure to 30 cities - Nationwide Central government Oct 10 Impose differential land value-added tax schedule Tightening penalizing high-priced housing projects.
Require the local housing authority to release rental price information regularly.1x PBOC base lending rate. all cities with provincial-level-equivalent fiscal power. Levy property tax (0. Further expand home purchase bans to cover all Tightening municipalities directly administered by the central government. progressive tax schedule. i. ** For detailed home purchase restrictions see extra table below Sources: IHS Global Insight. Tax base will be 100% of the home purchase price. currently at 5.3% of property value). based on the home purchase price. Ensure sufficient land supply in 2011. non-residents with at least one home as well as non-residents who have resided in one given city for less than a year will not be able to buy new homes in that city.e. more than 50% of which is for public housing construction and at least 70% for public housing and small/medium-sized commodity housing. for all secondhand homes sold less than five years after purchase. Chongqing Shanghai municipal government. the implementation of measures often occurs delayed or in reduced/weakened form. as well as cities where housing prices have increased excessively. Set target to build or acquire 1m units of all kinds of Supportive public housing during 2011-2015. Confiscate idled land from real estate developers if they leave the property undeveloped for a long time.1 . Set the interest rate to at least 1. Raise down-payment for mortgages on second home to at least 60%. Chongqing municipal government Feb 11 Nationwide Ministry of Housing and Urban-Rural Construction Feb 11 Beijing Beijing municipal government Q1 2011 unknown Nationwide Municipalities of Chongqing and Shanghai Ministry of Land and Resources Municipalities of Chongqing and Shanghai Measures in blue letters are planned. 2011 15 .5%. and set down per capita minimum housing occupancy area for rented apartments. but not yet imposed * Note that measures enacted by central agencies and ministries are not necessarily implemented by the local governments.China's housing markets Jan 11 Jan 11 Require local governments to set price control targets Tightening for new housing units (targets will be released within the first quarter of 2011). Tightening Chongqing: Imposed on three types of housing. Change land auction winning rules from the bidder offering the highest price to the bidder who can "best serve the public interest" (consideration of intended house price changes and other factors of public interest). the target is 200k units. IMF 21 April 28. Shanghai: Progressive tax schedule. all provincial capitals. Collect business tax. give public rental housing higher priority. The tax base will be 70% of the home purchase price. Tightening Tightening Nationwide Central government 36 cities Central government Jan/ 11 Shanghai. Housing rental/leasing regulation: ban unilateral rental Tightening increases initiated by the landlord during the leasing period. For 2011 particularly. Implement a trial property tax scheme. This means at least 36 cities will impose the purchase ban this year. Among various kinds of public housing. all local residents who already own at least two homes. Under the home restriction ban. rather than on the difference between the cost base and selling price.
24 1. local or from outside the city.41 2. regardless of currently owned number of homes. Each local household. Opinions expressed may change without notice.9 9. Households are only allowed to purchase one more home in the city.27 0.34 1. the same applies to local residents aged under 18. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London. In Japan this information is approved and/or distributed by Deutsche Securities Limited.8 7. Home purchase ban on residents owning at least two homes and non-residents with at least one home. One household is only allowed to buy one new home during the period from 1 October to 31 December. are allowed to purchase only one new home.8 6. whether contractual or otherwise. DB Research.80 % Chinese GDP Population (2009).9 5.27 0. No warranty or representation is made as to the correctness.54 0.28 1.0 2. D-60262 Frankfurt am Main. The above information does not constitute the provision of investment.46 7.8 6. published by Deutsche Bank. and in Singapore by Deutsche Bank AG.80 0. m Class-2: Chongqing Hangzhou Qingdao Wuhan Chengdu Dalian Shenyang Nanjing Ningbo Changsha 1.6 7.2 6. Households − both local residents and non-residents − are only allowed to buy one additional home. When quoting please cite “Deutsche Bank Research”.17 0.84 0. A single household can only purchase one more home.50 1. legal or tax advice.32 1. The above information is provided for informational purposes only and without any obligation.6 23 % Chinese GDP Population (2009). IMF Shanghai Beijing Ningbo Hangzhou Guangzhou Xiamen. Singapore Branch. Nanjing The number of homes that each household can purchase is restricted to two for permanent residents and one for nonresidents who have worked in the city for at least a year.96 0. can only buy one new home. In Australia. All rights reserved. in Korea by Deutsche Securities Korea Co. 16 April 28. including research. Germany.14 6. m Class-3: Jinan Zhengzhou Harbin Shijiazhuang Changchun Xi'an Fuzhou Hefei Nanchang Kunming Hohhot Xiamen Taiyuan Nanning Urumqi Lanzhou Guiyang Yinchuan Xining Haikou 0. Opinions expressed may differ from views set out in other documents. Deutsche Bank AG.8 3.4 5.01 12. permanent resident or non-permanent resident who has resided in the city for over a year. Tokyo Branch.8 7.7 1. New home purchases by households already owning properties are banned.3 5.6 1.7 6.3 1.48 0.45 0. Households.8 7. completeness and accuracy of the information given or the assessments made. This information is distributed in Hong Kong by Deutsche Bank AG.24 1. non-local households only one.7 7.48 2.68 2.6 8.4 3. Non-residents are not allowed to purchase homes in the city. authorised by Bundesanstalt für Finanzdienstleistungsaufsicht.48 0.4 11.98 0.0 7. Hong Kong Branch. which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates.44 1. Both local and non-local residents are allowed to buy only one home for a single household.4 4. the local government has reaffirmed a home purchase restriction rule instated in 2006. own classification © Copyright 2011.20 14. Sources: IHS Global Insight. Any views expressed reflect the current views of the author. 2011 Printed by: HST Offsetdruck Schadt & Tetzlaff GbR.91 0.9 1.62 0.5 % Chinese GDP Population (2009).10 32. residents with at least two homes and non-residents with at least one residence are not allowed to buy any new homes.97 0.15 0.Current Issues Home purchase restrictions/bans for selected cities in detail: Shenzhen. For foreigners.44 0.32 0. One household is only allowed to buy one apartment. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt. Fuzhou One household is only allowed to buy one new home during the period from 1 October to 31 December.92 1.46 9.74 0. Local households are only allowed to purchase up to two homes in the city. Dieburg ISSN Print: 1612-314X / ISSN Internet and e-mail: 1612-3158 . Sanya Wenzhou Dalian Suzhou Lanzhou 22 Classification of cities City Class-1: Shanghai Beijing Guangzhou Shenzhen Tianjin 4.3 9. which only allows expatriates who have worked or studied in the city for over a year to buy apartments in Guangzhou. m Sources: NBS.95 2.53 0. retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.2 3. a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK.3 2.30 1.0 5.38 3. Locals and non-locals are only allowed to buy one more home.
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